GBP/AUD buoyant amid rout in AUD/USDAUD/USD slide reinforces support at 1.88Hot CPI not enough to steady AUD’s shipRBA still seen lagging Fed & BoE on rates

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The Australian Dollar fell towards early-December lows against the greenback this week in a bearish technical development for AUD/USD that could potentially ensure that GBP/AUD remains buoyant above an important support level around 1.88 over the coming days.

Australia’s Dollar slipped over the edge of an important ledge of support against the U.S. Dollar on the charts this Monday before falling back to some of its lowest levels since the early days of December as the new week got underway.

Heavy losses for global stock markets were instrumental in pushing AUD/USD briefly below 0.71 to open the new week, which effectively ended a multi-week recovery attempt, while strength in the U.S. Dollar was keeping the Aussie suppressed and GBP/AUD buoyant on Tuesday.

“AUDUSD has broken its short-term uptrend from December to suggest the corrective recovery is over and broader downtrend is resuming,” says David Sneddon, head of technical analysis trading strategy at Credit Suisse.

“Key now is the January YTD low at .7129, removal of which should reinforce our view for a retest of medium-term support at .6992/91 – the late 2020 and 2021 lows,” Sneddon and colleagues wrote in a Monday review of the Australian Dollar’s charts.

Above: AUD/USD shown at daily intervals with Fibonacci retracements of December recovery indicating likely areas of technical support for the Aussie.

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AUD/USD’s reversal to the downside has got the Credit Suisse team watching the 0.7129 and 0.6991 levels closely as Sneddon and colleagues say a sustained dip below here would indicate that further declines as far as the 0.67558 threshold are likely in the weeks and months ahead.

That would be a bullish development for the Pound to Australian Dollar rate, which tends to closely reflect the relative performance of AUD/USD and its Sterling equivalent, GBP/USD, and is often seen rising when the former of the latter two is under pressure.

“The pressure on the Reserve Bank (RBA) to pullback support and start a rate hike cycle is building following another hot inflation print. Underlying inflation increased 1.0% in the December quarter to be 2.6% higher over the year. This is the highest annual rate in more than 7 years and the second consecutive print within the RBA’s target band,” says Matthew Bunny, an economist at St George Bank.

A rising U.S. Dollar kept the Aussie under pressure on Tuesday and helped GBP/AUD to remain afloat above 1.88 even after Australia’s final quarter inflation numbers surprised on the upside of almost all economists’ forecasts in the overnight hours.

GBP/AUD reference rates at publication:

Spot: 1.8887High street bank rates (indicative band): 1.8226-1.83566Payment specialist rates (indicative band): 1.8717-1.8793Find out about specialist rates, hereSet up an exchange rate alert, hereAustralian inflation rose by 1.4% during the quarter, taking the annual rate up to 3.5% and prompting bond market investors and traders to speculate with greater confidence that the Reserve Bank of Australia (RBA) could be likely to begin lifting its interest rate over the coming months.

“Our Australian economics team now expect the RBA will raise the cash rate by 15bp in August 2022 (previously November 2022), with the risk tilted to an earlier move in June. We still expect the RBA to end the bond buying program when it meets next week,” says Kim Mundy, a senior economist and currency strategist at Commonwealth Bank of Australia.

“Our new RBA view reduces one of the downside risks to AUD we had flagged. Nevertheless, the backdrop of weakening equity markets and the potential for a more hawkish FOMC leaves the balance of risks tilted to a weaker AUD closer to 0.70 in the near term,” Mundy also warned on Tuesday.

While analysts and investors increasingly expect the RBA to abandon earlier guidance suggesting its cash rate would be unlikely to rise much before 2024, the Australian Dollar has remained under pressure against the U.S. Dollar and Pound because the bank is still widely expected to lag behind the Federal Reserve and Bank of England when it comes to reversing the interest rate cuts and other monetary support provided since early on in 2020.

Above: GBP/AUD shown at daily intervals with Fibonacci retracements of mid-December recovery indicating likely areas of technical support for Sterling.